UK Government Follows Through On BNPL Regulation

The 'new' UK government has followed through with earlier plans to regulate 'Buy Now Pay Later' (BNPL) short term installment credit that had stalled under the previous government. The regulated version will be called 'deferred payment credit' (DPC). The regulations won't bite until mid-2026, but it's good to finally have certainty as to what is regulated (if not the fine detail yet). And merchants, fintech service providers and credit reference agencies can use the 12 month window to figure out ways for consumers to keep track of both their regulated DPC and unregulated BNPL instalment credit. I've already summarised the latest proposals for Keystone here for information purposes, and have added a few thoughts below to consider. If you need advice on the plans, please let me know. 

Given that BNPL agreements directly with a merchant will remain unregulated, there remains an opportunity for third party finance providers (whether FCA-authorised or not) to work with merchants on unregulated BNPL. Structuring the overall offering to remain unregulated will take care, however.

The proliferation of DPC/BNPL arrangements should prove a boon to 'open banking' or 'account information service' providers who can offer consumers visibility of all their obligations, whether directly or via device manufacturers, DPC lenders or even merchants themselves.

There's also a growing credit reference/assessment challenge as more consumers take on more instalment credit, whether regulated or not.

The government is right, in my view, to keep a weather eye on the unregulated BNPL market to see if intervention is required, before acting. Third party lenders who complain about an uneven playing field between should also consider that regulating merchant BNPL could hurt smaller merchants in favour of larger merchants who already possibly have the resources to offer better instalment options, let alone bear the burden of being FCA authorised (not to mention the strain on the FCA itself in taking on every merchant that wishes to offer BNPL/DPC!).

 

Update on Buy Now Pay Later Reforms

Please see my 'Keynote' on this topic.

UK Consults On BNPL Regulation

Further to my note in June, the UK Treasury is now consulting on the enabling legislation necessary to narrow the exemption for Buy Now Pay Later (BNPL) products, paving the way for greater supervision of the sector by the Financial Conduct Authority. I've included a quick summary of the provisions below. If you need assistance in understanding the potential impact of the proposed regulatory changes, please let me know.

Basically, the scope of consumer credit regulation is being expanded to include BNPL agreements offered by lenders but not by suppliers directly. The government had intended to regulate all BNPL agreements provided by suppliers either online or at a distance, but this was found to disproportionately impact many types of arrangement where there is little, if any, evidence of consumer detriment.

In effect BNPL agreements will be regulated where they are 'borrower-lender-supplier' agreements for  fixed-sum credit (the existing 'running accounts exemption' is not affected) to individuals, small partnerships etc., which are: 

• interest-free; 
• repayable in 12 or fewer instalments within 12 months or less; 
• the credit is provided by a person that is not the provider of goods or services which the credit agreement finances (i.e. third-party lenders); and 
• not specifically exempt under other consumer credit exemptions (plus a new, related exemption). 

There's an 'anti-avoidance' measure to capture agreements where the merchant has an arrangement with the third-party lender to sell the goods to the lender at the point when the agreement is taken out (seeking to turn the lender into a supplier). 

Trade credit and invoicing arrangements will remain exempt, but new specific carve-outs have had to be made to finance insurance contracts/premiums; registered social landlords to their tenants to finance the provision of goods and services; and where the borrowers are employees and which result from an arrangement between their employer and the lender or supplier.

The relevant agreements will qualify as regulated credit agreements within the consumer credit regime under the Regulated Activities Order (RAO). Firms offering those agreements and related regulated activities will need to be authorised and supervised by the FCA, with complaints referable to the Financial Ombudsman Service. 

These agreements will not benefit from lighter regulation that applies to 'small agreements' but will be spared certain pre-contract explanations under the Consumer Credit Act 1974 (CCA) in favour of more proportionate FCA disclosure rules. Consumers are also spared a deluge of information because certain other distance marketing disclosures won't need to be made for these agreements by unauthorised brokers where the information has already been provided by the authorised lender.

Those introducing borrowers to lenders to obtain regulated BNPL agreements will not need to be authorised for credit broking unless conducting that activity in the borrower's home.   

Advertisements and other 'financial promotions' communicated by unauthorised firms for regulated BNPL agreements will need to be pre-approved by an FCA authorised firm (which will not include a firm acting as a payment or e-money institution).

The new regulations won't apply to relevant agreements entered into prior to the changes taking effect; and there are transitional arrangements to enable firms to carry on certain regulated activities in relation to regulated BNPL agreements for a limited time to allow them to get properly authorised, but the duration is a matter for the FCA. It's worth noting, however, that any business that does take advantage of the 'temporary permission regime' must comply with the law and FCA rules applicable to consumer lending (or exercising a lender's rights) and credit broking (if visiting borrowers' homes). That is unlike previous 'grandfathering' type arrangements, where firms could continue as they were until authorised; and potentially problematic, as any unregulated lender offering BNPL today would likely face a very steep climb to operating on a regulated basis.  

It is also left to the FCA to determine how its rules on credit checks, which could prove a thorny issue to the extent we are focusing on borrowers who can't afford the price of fairly low value consumer items. 

But there remains uncertainty over the extent to which the form of agreements and post-contractual notices will be prescribed.

The limits for the application of 'section 75' CCA liability for suppliers will not be altered (£100 to £30,000).

If you need assistance in understanding the potential impact of the proposed regulatory changes, please let me know.

Buy Now Pay... Earlier

Retailers have always been fond of "buy now pay later" offers, but perceived abuses (or lack of clarity) discovered by the FCA must end by November. 

Typically, a BNPL credit offering involves a 'promotional period' of 3 to 12 months in which no repayments are required and no interest is payable at all if the consumer repays in full during the promotional period. After the end of that period, repayment obligations begin; and interest is charged for the promotional period. Uncertainty arises where the consumer only makes partial repayments during the promotional period. Some creditors ignore partial repayments and still charge interest on the entire amount of credit for the promotional period, at least until the date of the partial repayment(s). This means that consumers who are uncertain whether they'll be able to repay in full during the promotional period also don't know whether to make part repayments. Even only narrowly missing full repayment in the promotional period could mean paying interest on the full amount of credit anyway - or nearly the full amount.

These types of offers could be either on a 'fixed sum' basis for a one-off purchase, or on a running account basis for each product purchased during any given month on a store card, for example, making it tough to understand which partial payments are credited to which purchase.

BNPL offers are not the same as a genuine "payment holiday" features, where interest is still being charged during the 'holiday' period when no repayments are due. Nor are they necessarily the same as a 0%APR offer that you see on cars, for example, where no interest at all is payable for a certain period (so long as there is no discrimination against partial repayments before the interest-free period expires). Credit cards effectively have a much shorter interest-free period of up to two months on each purchase (so you need to clear the whole running balance in that time).

The FCA wants to BNPL consumers to be free to repay as much as possible during the promotional period, so they incur less interest. Changes to the FCA's consumer credit rules (CONC) will require clear information to be given about BNPL credit offers, so consumers know the consequences of not repaying the full balance by the end of the offer period, with a reminder that the offer period is about to end.

The FCA will also prevent creditors claiming more interest on any amounts repaid during the promotional period than would be payable if they repaid the full amount, so consumers get the benefit of making partial repayments even if they don't clear the full amount of credit in that time. 

Creditors must comply with the disclosure rules by 12 September 2019, and must stop claiming interest on partially repaid amounts by 12 November 2019 for purchases after that date.